Introduction

Future asset restoration costs are associated with certain obligations that arise
when a capital asset is acquired, constructed, developed or already in operation;
however, these costs are not settled until the capital asset is retired at the end
of its useful life or at the end of the contractual term. Incurring future asset
restoration costs must be the result of a contractual or legal obligation. Examples
of such obligations include the need to restore the condition of a leased asset
at the end of a lease agreement, the need to dispose of certain types of fuel storage
tanks by regulation, the need to decontaminate certain waste materials before they
are released or the need to decommission a nuclear facility.

Recognition and measurement

Only a legal or contractual obligation associated with the retirement of a capital
asset that establishes a duty or responsibility to restore it justifies recognition
of a liability. These liabilities may encompass costs for dismantling, abandoning,
cleaning up or restoring a capital asset. When such costs can be reasonably estimated:

They shall be added to the carrying value of the
capital asset and amortized over the remainder of its useful life; and,

An allowance for the estimated costs for future asset
restoration shall be recorded as a liability.

If future asset restoration costs are expected to be significant but cannot be
reasonably estimated, this factshall be disclosed in the notes to the departmental
financial statements in accordance with TBAS 3.6 - Contingencies.

The rationale behind this accounting treatment is that the future asset restoration
costs are linked to the use of the capital asset and shall therefore be recognized
over the years of use rather than at the time the restoration work is performed.

A department shall recognize the liability for future asset restoration costs
in the period in which the capital asset is placed in service and when a reasonable
estimate of the costs can be made. The initial estimated restoration cost shall
be the fair value based on the best information available when the capital asset
is initially placed in service, such as quoted current market prices in active markets
or prices for similar work. If an estimated future cash requirement is provided
for the future restoration cost, the estimated future cash flow shall be discounted
at the Government of Canada lending rate to approximate the total fair value of
the capital asset when the capital asset is placed in service as shown in
Appendix A.

In subsequent years, a present value technique, inflated by the
Consumer Price Index
(CPI), shall be applied to the opening liability balance in order to estimate the
fair value of the closing liability at March 31 of each year (see Appendix B). While
estimates shall be re-examined whenever circumstances that would likely affect the
estimates occur or every few years, departments must ensure that at least a present
value adjustment is done annually in the absence of any reassessment. In other words,
departments are to factor in inflation to keep the estimates current.

Upon transition to this guidance, the fair value of the estimated restoration
cost of an asset at the time of the adoption of this guidance shall be added to
the carrying value of the asset already in service and amortized over the remainder
of its useful life.

A department constructs an observation tower on leased land, on the condition
that it restores the site to its original condition at the end of the lease term.

The tower cost $1,000,000 to construct and it is estimated that the initial discounted
cost to dismantle and remove the tower at the end of the 10-year term is $150,000
(current market quote). At end of Year 2, an additional present value amount of
$10,000 is estimated to be required to clean up the site.

(a) To record cost of tower and future asset restoration costs at Year
1

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Works and Infrastructure

1,000,000

16113

B14A(*)

1339

Debit: Works and Infrastructure

150,000

16113

F359

7099

Credit: Future Asset Restoration Liability

150,000

24112

F419

7029

Credit: Accounts Payable Ongoing

1,000,000

21111

R300

6299

(b) To record the change in the restoration cost estimate at the end
of Year 2

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Works and Infrastructure

10,000

16113

F359

7099

Credit: Future Asset Restoration Liability

10,000

24112

F419

7029

FRA coding rationale:

The $1,000,000 cost to construct the tower
and the $150,000 in future asset restoration costs are capitalized as part of the
asset balance using 16113. The $150,000 credit is to liability account 24112, which
will remain until the restoration work is performed 10 years later. Since the department
has not yet paid for the tower, a payable must be recorded for the amount owing
using 21111. At the end of Year 2, the additional $10,000 in site clean-up costs
is estimated and added to the asset using 16113 and to the liability using 24112.

Authority coding rationale:

In this example, it is assumed that
the cost of the observation tower would be charged to B14A. However, depending on
the department and the asset involved, other authority codes could be used, such
as B11A/B12A"or A131. As the costs associated with the future asset restoration
will only be disbursed in the future, F359 is used for the asset and F419 is used
for the liability. As usual, R300 is used for the accounts payable.

Object code 1339 is used to record
the cost of the observation tower. Object code 7099 is used for the increase in
asset value due to future asset restoration costs and 7029 is used for the corresponding
liability. Object code 6299 is used to establish the accounts payable.

(a) To record amortization of the
observation tower (end of Year 1 and 2)

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Amortization Expenses - Works and Infrastructure

115,000

51413

F111

3451

Credit: Accumulated Amortization on Works and Infrastructure

115,000

16213

F311

7061

(b) To record amortization of the observation tower (starting end of
Year 3)

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Amortization Expenses - Works and Infrastructure

116,250

51413

F111

3451

Credit: Accumulated Amortization on Works and Infrastructure

116,250

16213

F311

7061

FRA coding rationale:

Using straight-line amortization of 10
years, the cost of the asset and future asset restoration costs are allocated over
the useful life of the asset. Amortization Expense at end of Year 1 and 2 would
be $115,000 ($1,150,000 [divided by] 10 years). Starting end of Year 3, Amortization Expense
would be $116,250 [($1,150,000 [minus] $230,000 [plus] $10,000) [divided by] 8 years].

If there is a salvage value of $20,000 discounted, that is expected from selling
the dismantled structure at the end of the term, the amount to be amortized would
be $980,000 ($1,000,000 [minus] $20,000) and Amortization Expense at end of Year 1 and
2 would be $113,000 [($980,000 [plus] $150,000) [divided by] 10 years]. Starting end of Year 3,
Amortization Expense would be $114,250 [($980,000 [plus] $150,000 [minus] $226,000 [plus] $10,000) [divided by] 8
years].

Authority coding rationale:

F111 and F-311 are used because
expenditures for the construction of the tower were charged to an appropriation
in the previous journal entry. Accordingly, the appropriation is not affected when
the amortization expense of the constructed tower is recorded.

The present value adjustment is calculated
by multiplying the closing balance of the previous fiscal year's future asset restoration
liability by the CPI factor. See "Other Misc Expenses" column in
Appendix B. The present value adjustment is debited to
a miscellaneous expense account 51729 and credited to the future asset restoration
liability account 24112.

Authority coding rationale:

F120 and F419 are used because the
costs associated with the future asset restoration will only be incurred in the
future.

F120: Expenses Related to the Increase in the carrying amount of an asset restoration
liability due to the passage of time

F419: Charges to Other Accruals and Allowances

Object coding rationale:

Object code 3469 is used for operating
expenses relating to the inflation adjustment and 7029 is used for the corresponding
liability. The resulting liability balance is the estimated fair value of the future
asset restoration liability at year-end.

3469: Charges to Other Liability Accounts

7029: Other Allowances

3. End of the lease term - See Appendix B for annual calculations related to figures used in the accounting entries below.

Scenario A - Ten years have passed and the lease period has ended.
The tower is dismantled and removed and the site is restored to its original condition.

The balance of the future asset restoration liability is $194,566 ($150,000 [plus]
$10,000 [plus] present value adjustments of $34,566). However, the actual demolition
of the tower and clean-up costs amount to $175,000 (a) or $210,000 (b).

(a) To record the actual restoration cost when it is less than the liability
balance

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Future Asset Restoration Liability

175,000

24112

B14A(*)

0819/
0499

Debit: Future Asset Restoration Liability

19,566

24112

F419

7029

Credit: Other Miscellaneous Expenses

19,566

51729

F120

3469

Credit: Accounts Payable Ongoing

175,000

21111

R300

6299

(b) To record the actual restoration cost when it is more than
the liability balance

Financial Reporting Account (FRA)

Amount $

FRA code

Authority code

Object code

Debit: Future Asset Restoration Liability

194,566

24112

B14A(*)

0819/ 0499

Debit: Other Miscellaneous Expenses

15,434

51729

B14A(*)

0819/ 0499

Credit: Accounts Payable Ongoing

210,000

21111

R300

6299

FRA coding rationale:

Debit 24112 to settle the liability of
$194,566 ($150,000 [plus] $10,000 [plus] present value adjustments of $34,566) that was originally
recorded as the estimated future asset restoration costs. A credit to 21111 for
the actual restoration cost and to set-up the accounts payable is recorded. The
difference between the liability balance and the actual accounts payable is credited
or debited to 51729.

Authority coding rationale:

Given this is a legitimate charge
against an appropriation, the actual restoration costs are charged to the capital
vote, B14A, or to other appropriate authorities, such as B11A/B12A or A131. The
excess in the liability balance over the actual restoration cost in (a) shall be
reversed against F419, the original authority code used. As Accounts Payable does
not have an impact on authorities, R300 is used.

Debit: Cash in Hands of Departments Awaiting Deposit to the Receiver General

600,000

11125

R300

5299

Debit: Accumulated Amortization on Works and Infrastructure

578,750

16213

D321

4843

Credit: Works and Infrastructure

1,160,000

16113

D321

4843

Credit: Gain on Disposal of Capital Assets to Outside Parties

194,974

42411

D321

4843

FRA coding rationale:

The liability of $176,224 ($150,000 [plus]
$10,000 [plus] present value adjustments of $16,224) that was recorded as the estimated
future asset restoration costs is debited. The asset is credited by its historical
cost and the related accumulated amortization is debited, which removes them from
the system. The difference between the proceeds less the net book value of the capital
asset and the future asset restoration costs is credited as a gain (or debited as
a loss as is appropriate).

Authority coding rationale:

Because the cash received has no
impact on authority, R300 is used. D321, which is a restricted spending authority
code for the disposal of surplus Crown assets, is used for the remaining debits
and credits.

R300: Total (or Net, as applicable) Amounts of All Other Assets and of All Other Liabilities

D321: Proceeds from Disposal of Moveable Surplus Crown Assets

Object coding rationale:

As economic objects are recorded on
an expenditure basis, 5299 is used to record the net impact on the cash account
and 4843 is used to record the proceeds from the sale

4843: Sales of Surplus Crown Assets

5299: Net Increase or Decrease in Cash Account

Appendix A

Discounting future cash requirement

In 2010-11, a department signs a 25-year lease for its office space. The lease
agreement requires the department to pay $200,000 to the lessor at the end of the
lease term to remove all fixtures and improvements installed by the department.

Please note that the 4.03% discount rate used in this example is the Term Rate
with 25 years to maturity at December 2009. Departments shall consult the website
of the Department of Finance for the most recent Government of Canada lending rate.

Appendix B

Accounting Entries Table
Assumption: A Consumer Price Index (CPI) of 2% over the years.